Knowing how much your company is worth is an excellent way to measure your success. Therefore, for a multitude of reasons, smart business owners should have a ballpark estimate on how much the business is worth. You never know when the right opportunity may come along.
There are a number of ways to determine how much a business is worth. Below is a formula that may be used to calculate the value of a staffing firm. Remember, only a professional business broker in conjunction with your accounting firm can tell you the true value of your business and these formulas are to serve only as a guide only.
SDE Seller's Discretionary Earnings (SDE) more commonly known as EBITDA - earnings before taxes (operating income); interest; depreciation and amortization; owner(s) compensation; owner(s) benefits; and non-recurring expenses.
EBITDA (SDE) X MULTIPLE = SALE PRICE
The multiple basically is how many times EBITDA (or SDE) a buyer is willing to pay for the business. Lately, I have seen multiples between 2 – 4 times EBITDA on sales of staffing businesses.
But what drives the multiple? Some of the external drivers of the multiple include:
Overall Industry Growth Potential
National and Local Economic Outlook
Segment of Staffing Market Served
Amount of interest by outside investors or large staffing companies seeking to increase market share
National and Local Political Climate
Most of these items are out of the owner’s control. But there are some factors that owners can control in order to increase a staffing firms value. These include:
Financial Strength of your customers and average DSO of accounts receivable
Diversification of accounts receivable and client base
Percentage of the business that is contract labor (temporary help)
Gross Margins
Length of contract or exclusivity agreements with your clients
Internal Management Team
Most importantly for a staffing company.... how much of your business is contract or temp? The direct hire business is great, but buyers of staffing consider that transnational, meaning once the hire is made and the invoice paid the transaction is concluded - no further business may come out of the relationship. Additional orders tend to follow the recruiter and not necessarily the company.
Contract business is viewed much differently. That business is reoccurring for a contractual period of time, sometimes indefinitely. The staffing company is servicing the account on a weekly basis and tends to stay with the company even after it is sold.
Maximize Your Company’s Worth
Sales and gross profit. These are the most important items that determine the “worth” of your business. The higher the sales, the more market share your company owns. The higher percentage of sales due to temporary help placements, the more valuable your company will be. Lastly, the higher the sales and assuming proper profit margins, the more dollars flow to income.
Using an asset based, unlimited funding facility will maximize the net worth of your business – period. Unlimited payroll funding will allow you to increase market share as well as increase the net earnings side of the equation with contract placements.
EBITA (SDE) X MULTIPLE = SALE PRICE
Outsourcing the back-office and technology functions (software, payroll, billing, collections) allows you the time to concentrate on the multiple. Outsourcing non-revenue producing functions will help your company achieve two important goals in order to increase the value of your business.
1. No large upfront investment for internal employees, software, hardware etc. A funding services cost is variable based on company sales. Fixed cost tend not to add value to the sale of the business.
2. By keeping internal functions to a minimum, it allows the staffing owner time to strategize, sell and recruit which grows sales, market share and profits. Plus, outsourcing frees up time that can be spent outside of the office.
Example of Increasing ABC Staffing’s Worth
Self Funded or Limited Funding Using Full Service Unlimited Funding
Current Billings = $1,000,000 Potential Billing $3,000,000
Current EBITA = $100,000 Potential EBITA = $290,000
Current Value ABC Staffing Potential Value ABC Staffing
$100,000 x 2 = $200,000 $290,000 x 4 = $1,160,000
By using a full service unlimited funder, ABC Staffing was free to focus on its core competencies: Strategy, Sales, and Recruiting. Not only did ABC Staffing save tens of thousands of dollars in fixed costs, its worth grew by almost $1,000,000!
The purchaser may also increase EBITA by adding back a portion of the variable expenditure. For example, by outsourcing your back-office functions, perspective buyers can back out more of that cost as they typically already have their own back office processes in place. There are not severance packages to be paid or equipment leases that need to be bought out. Usually some of that cost is added back into EBITA (or SDE) which increases the net worth of the business.
This post should be used for informational purposes only as there are more adjustments that are usually made to determine EBITA and multiples vary over time. Contact a merger and acquisition specialist to receive an actual valuation of your business.
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